By Evelina M. Tainer, Chief Economist, Econoday
February 14, 2003

Aside from another dip in consumer sentiment, economic news was relatively friendly this week. Industrial production rose more than expected and non-auto retail sales surged. Fed chairman Alan Greenspan delivered his semi-annual report on monetary policy to Congress. His remarks on the economy were neutral, pointing to the fact that no one knows how a war with Iraq would impact U.S. economic growth. On the whole, he feels that the economy is poised for a moderate recovery free from accelerating inflationary pressures.

Greenspan spoke at length about the negative impact that budget deficits would have on the economy and interest rates. While he favors the President's plan to eliminate double-taxation of dividends on grounds of tax efficiency, he feels that the tax cuts in the plan are too much and at the wrong time. He does not believe that fiscal policy is necessary at this time and feels that monetary stimulus is sufficient to get the economy rolling in coming months. He expressed his view, shared by many economists, that burgeoning budget deficits tend to raise the overall level of interest rates because the private sector must compete with government borrowing.

Greenspan and the economy really did take a back seat to the geopolitical situation. The week started with the U.S. in Orange terror alert. Daily events took on new meaning as tunnels and bridges closed in New York City (no problems were found). Washington D.C. and New York City have heightened security dramatically and both cities have military planes flying overhead. The increased security in the U.K. found a Venezuelan man with a live hand grenade in his luggage. These events fed negative psychology daily.

Finally, Hans Blix reported on Iraq once again and found some improvement over his original report from two weeks ago. He said there has been no banned weapons found but he still demanded more evidence from Iraq. Not surprisingly, the response to his report before the UN Security Council was mixed. Germany and Russia feel that Iraq is proceeding sufficiently. Secretary of State Colin Powell dismissed the Blix report and claimed that Iraq is hiding weapons and is not disarming quickly enough. The U.S. continues to claim that a link between Al-Qaida and Iraq exists. Germany and Russia don't believe they have seen evidence that the link is true.